Historically speaking, most U.S. recessions arrive after a period of rate tightening by the Federal Reserve. As the Fed raises interest rates to tame inflation, it begins to cause economic activity to contract. Of course, “Fed-induced recessions” usually start in the housing market.
We’re already seeing it.
Not long after mortgage rates spiked this spring, the U.S. housing market slipped into a housing downturn. That housing downturn has seen new- and existing-home sales slump across the country. In some markets, like Seattle and Las Vegas, it has already spurred a home price correction.
The silver lining for agents and builders? Usually, the U.S. housing market is FIFO: first into the recession and first out of the recession. The big exception was the housing bubble, which saw the U.S. housing market slip into a downturn in 2006. That downturn, which lasted through 2011, was three times as long as the Great Recession.
That raises the question: When will this ongoing housing downturn—which officially started this summer—conclude?
To better understand where the housing downturn heads next, Fortune reviewed the latest housing market outlook published by Wells Fargo. Let’s take a look.
The Pandemic Housing Boom was an absolute boon for the brokers, builders, and agents. In 2020, so-called housing GDP soared 12.8%. Then in 2021, it spiked another 9.9%.
Heading forward, all of those activity gains could soon be erased. At least that's what Wells Fargo sees. This year, Wells Fargo projects sharp declines in new-home sales (-10.5%), existing-home sales (-7.4%), single-family housing starts (-7.3%), and housing GDP (-10.1%).
Then, in 2023, Wells Fargo expects the housing downturn to intensify further. Next year the bank forecasts another drop in new-home sales (-6.5%), existing-home sales (-13.1%), single-family housing starts (-12%), and housing GDP (16%).
"A housing correction is already well under way...The primary driver behind the housing market correction thus far has been sharply higher mortgage rates," write Wells Fargo researchers. And they don't see much mortgage rate relief coming next year. "The fiercely hawkish Fed is one reason why we expect mortgage rates to remain above 6% through Q4-2023."
Whatever you call it—housing downturn, housing correction, or housing recession—the housing slump is clearly putting downward pressure on home prices. Wells Fargo predicts that national home prices will sink 5.5% next year. But it will vary significantly by market.
"Markets where home prices shot the highest are now vulnerable to a disproportionate swing to the downside, notably in previously white-hot markets in the Mountain West which saw an influx of remote workers at the onset of the pandemic. Home prices in desirable locations with comparatively tighter supply are likely to hold up much better," write Wells Fargo researchers.
Unlike the six-year housing downturn that started in 2006, Wells Fargo predicts this ongoing housing downturn should fizzle out heading into 2024. In fact, Wells Fargo predicts in 2024 that housing GDP will rise 5.1% while U.S. home prices rebound by 3.1%.
"If our forecast for Fed rate cuts is realized, mortgage rates are likely to fall slightly [in 2024] just as cooling inflation pressures boost real income growth. A modest improvement in sales activity should then follow, which will reignite home price appreciation heading into 2024," the Wells Fargo researchers write.
Want to stay updated on the housing downturn? Follow me on Twitter at @NewsLambert.
